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Understanding value

  • #21
  • Jul 6, 2014 7:42pm Jul 6, 2014 7:42pm
Quoting Ponzi Jr
{quote} Alternatively, do you think it's (theoretically) possible to objectively calculate changes in value based on changing variables? If not, do you think that there are any objective attributes of value? Would you be confident in saying that 1kg of sand is not worth $10,000?
Value is in the eye of the beholder. When that is the case, you can throw objectivity out the window because subjectivity has taken over.
I'm not trying to convince anyone. I'm not in the "convincing" business.
  • #22
  • Jul 7, 2014 7:59am Jul 7, 2014 7:59am
I difference between 'Price' and 'value' increases when certain parties either desperately need the asset/object or alternatively they have overwhelming personal desire for the asset/property such that they are willing to pay a significant premium as compared to the rest of the market.....we often see this via Acquisitions in the technology sector or prime real estate where bid premiums are exceptionally high when compared to fundamental valuation multiples or discounted cash flows. The buyer may be able to extract a greater value in synergies or intangible assets as compared to other bidders, hence what the value is to one buyer may be significantly beyond what the other 99% of the market would be willing to pay.
Obviously when the objects are necessities, I think 'value' and 'price' become ever closer with an increase in liquidity, volume and market participants with a common need and use for the underlying.....
  • #23
  • Jul 7, 2014 3:10pm Jul 7, 2014 3:10pm
Quoting skenobi
{quote} Value is in the eye of the beholder. When that is the case, you can throw objectivity out the window because subjectivity has taken over.

http://en.wikipedia.org/wiki/Economic_equilibrium

There is a method which allows us to know where is the value. You can use this concept in order to know what is the highest traded price, so where is the value. If there is a lot of volume at one given price, it means that sellers and buyers do agree on doing business at this price. It's an objective way. Then the question is : Which timeframe's value do I want to know? It depends on your personal trading.
  • #24
  • Jul 7, 2014 4:25pm Jul 7, 2014 4:25pm
Thanks to JPS, I like to think of a steady trend as a condition where value is moving ahead of price. Price isn't moving fast enough to catch up until it spikes up way past value and overtakes it at which point price is above value and comes back down to match it.

It gets hard when trying to know where value is on different time frames. Value trends on a daily basis can be moving up and value intra-day can be moving down. I believe if you have a clear idea of what value is doing multi day, then you can respond to prices that are very short term opposite the direction of where you decided value was. (e.g., value might be moving higher over many days but a news announcement comes out which knocks the market down, making it a great value buy on the day and probably on the week)

Then there are many games you can play with previous agreed value areas which become support / resistance.
  • #25
  • Jul 7, 2014 6:58pm Jul 7, 2014 6:58pm
Quoting Unabletrader
{quote} http://en.wikipedia.org/wiki/Economic_equilibrium There is a method which allows us to know where is the value. You can use this concept in order to know what is the highest traded price, so where is the value. If there is a lot of volume at one given price, it means that sellers and buyers do agree on doing business at this price. It's an objective way. Then the question is : Which timeframe's value do I want to know? It depends on your personal trading.

Point noted.

Consider this, however: Just because sellers and buyers agree on doing business at this price, doesn't always mean that both parties see the transaction at the same value. There's always an element (however tiny it may be) of someone stiffing the other and/or someone being stiffed.

To me the question of value is irrelevant. Value is academic and nice-to-know and all that.

But price is the only thing that matters and consequently the trend of that price whether it's going up or down or sideways.
I'm not trying to convince anyone. I'm not in the "convincing" business.
  • #26
  • Jul 7, 2014 7:19pm Jul 7, 2014 7:19pm
Momentum "price led" players are one part of the market. Anyother big part is the value led players. To borrow an analogy from a living legend, a house wife "buys the dip" when things are on special at the local supermarket, no different from a prop trader who feels the dip on the day is probably the low. Supply and demand has a direct impact on value, price is just the messenger to tell us how confident the auction process is.

I like to look for times when buyers are forced to buy at high prices as an indication that value is moving away from them and making them anxious enough to act "at worse" prices.
  • #27
  • Jul 7, 2014 7:47pm Jul 7, 2014 7:47pm
Quoting Hyperion
Momentum "price led" players are one part of the market. Anyother big part is the value led players. To borrow an analogy from a living legend, a house wife "buys the dip" when things are on special at the local supermarket, no different from a prop trader who feels the dip on the day is probably the low. Supply and demand has a direct impact on value, price is just the messenger to tell us how confident the auction process is. I like to look for times when buyers are forced to buy at high prices as an indication that value is moving away from them...
Great post!
I agree with your "school of thought"...............

Time, the market's regulator, and Price, the marker's advertiser, together creating the Opportunity (TPO) to buy or sell at a given price at a particular time.

Price is simply the auction’s means of advertising opportunity. Time regulates each opportunity. Price is the mechanism the market employs to advertise for opportunities; some opportunities are accepted, while others are rejected.

IMO, I feel traders must learn to discern 'price' from 'value'. Price advertises opportunity, you must understand 'price in context'
Price is advertising, the markets “response” to the "advertised" price is the key.

IMO, Markets are much more understandable if you think of price as simply an advertising mechanism; you want to learn how to gauge the market’s collective response to each ad, as it were.

Unfortunately, most traders focus solely on price, not its "qualifications".
Markets are not efficient, rather they are effective - Jones
  • #28
  • Jul 7, 2014 11:52pm Jul 7, 2014 11:52pm
Thanks MVVEGA, but I wish it was original. It is my sincere beleif about the markets and credit goes to JPS who first articulated this auction type thinking. I only don't mention his name fully because everyone seems so fixated with some pretenders who followed him rather than the originator! enough said. I'm on my second large JD and coke now so better stop.
  • #29
  • Jul 7, 2014 11:53pm Jul 7, 2014 11:53pm
sorry MZVEGA for name spelling! Hick, pour me another.
  • #30
  • Jul 9, 2014 1:37pm Jul 9, 2014 1:37pm
My opinion on that:

If you wanna understand value then you have to compare the "(a)leading price instrument" to an "(b)replicated-price-instrument".

(b)replicated-price-instrument = ((similar stuff) price at location1) : ((similar stuff) price at location2)
the more and heavily traded the better

then do the math:
(a) : (b)

if there is any big difference it means: very good arb opportunity.
  • #31
  • Jul 9, 2014 2:43pm Jul 9, 2014 2:43pm
Quoting UnnamedPlayr
My opinion on that: If you wanna understand value then you have to compare the "(a)leading price instrument" to an "(b)replicated-price-instrument". (b)replicated-price-instrument = ((similar stuff) price at location1) : ((similar stuff) price at location2) the more and heavily traded the better then do the math: (a) : (b) if there is any big difference it means: very good arb opportunity.
what you described is exactly how bubbles form: Oh this tech company is valued 40 times its earnings. The whole sector (or a second tech company) is valued 50 times its earnings. The company with 40 times its earnings is cheap compared to the market, let's buy it. And then a year later people realize that actually the whole sector is overvalued and should trade a 10 times its earnings or can't be valued at all. (see 2001/02 (tech bubble) and 2008 (subprime mortgage bubble) for examples) - that's a good recipy to lose your savings.

For trading value is irrelevant, it's only important when investing. It takes years for price to come back to its value. And valuing countries is something really difficult, which I think is difficult for normal people. Already valuing companies is a hard task, you need to get rid of one-off effects, challenge the balance sheet for manipulative accounting, look at the business model, the industry it operates in, where the risk in the business lies and put all these factors into hard numbers to come up with a "value price" to challenge the market price. Takes a time to come up with a good "value". And yes, it's definitely personal, cause you also need to discount all the profits with the return you require at a minimum for the risk you take on.
  • #32
  • Jul 9, 2014 3:39pm Jul 9, 2014 3:39pm
Quoting UnnamedPlayr
My opinion on that: If you wanna understand value then you have to compare the "(a)leading price instrument" to an "(b)replicated-price-instrument". (b)replicated-price-instrument = ((similar stuff) price at location1) : ((similar stuff) price at location2) the more and heavily traded the better then do the math: (a) : (b) if there is any big difference it means: very good arb opportunity.
This is the bread and butter of HFT. So can you still find something as retail?

For example I looked at the USDOLLAR FXCM instrument versus it's composite rates, and a few variations, but I couldn't find something workable.

Can you give an example of a replicated instrument that you managed to do this on? I assume that at least one of them was a directly tradable one, not a synthetic.
  • #33
  • Jul 9, 2014 7:44pm Jul 9, 2014 7:44pm
Yes, it's possible. I've built a replica for the EUR/USD and no it's not only HFT.

A "replica" is usually a basket of (exchange or OTC traded) instruments.

With the right tools you can build and calculate your own "replica" to compare the biggest markets (fx,bond,equity).

Then you can see if the current price matches with the overall value or if there:

will be a coming move (stop hunt),
was only a stop hunt,
some market player are forced to put more money into certain assets to close the value-gap.

Hope that helps a bit.
  • #34
  • Last Post: Edited 5:19am Jul 10, 2014 2:14am | Edited 5:19am
Value has two halves...intrinsic value and perceived value.

Intrinsic is the actual underlying value. The true value that analysts and economists try to figure out. Perceived value is the price that the market assigns any given asset, regardless of its intrinsic value.

It is pointless to trade the markets based on fundamental/intrinsic value. Fundamentals can only tell you how far a move will extend once a catalyst enters the picture to change the trend. That catalyst is liquidity.

Perceived value is EVERYTHING, remember reflexivity.
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